Tuesday, April 9, 2013

The Populist experiment starts

The ghosts of Jacob Coxey, Ignatius Donnelly, William Jennings Bryan, L. Frank Baum, A. C. Townley, Edison and Ford are grinning from ear to ear.  Me too!  Most people forget that Populism (the real thing) was about economics and more specifically, the kind of economics that allowed the Producer Classes to thrive.  This was the economics of economic development needed by folks trying to claw out a living from the virgin soils of the frontier.  Now we find an economic development specialist at the head of the central bank of Asia's (still) most interesting economy.  I would rate his chance of success at near 100%.  Strategies like Kuroda's have an astonishing track record.

Yen slumps to new low as Bank of Japan unveils stimulus plan

Yen dips against major currencies after Bank of Japan buys government bonds in effort to beat deflation
Reuters guardian.co.uk, 8 April 2013

Bank of Japan governor Haruhiko Kuroda said last week it would inject about $1.4tn into the economy, a gamble that sent bond yields plummeting. Photograph: AP

The yen hit fresh lows against a host of major currencies on Monday, resuming its slide after the Bank of Japan lost no time in launching its new easing policy to underline its determination to beat deflation.

The central bank conducted its first government bond buying operations on Monday and said it will buy 1tn yen of bonds with maturities of between five and 10 years, and 200bn yen of bonds with maturities exceeding 10 years.

The dollar gained 1% to 98.54 yen after jumping more than a full yen to 98.85, its highest since June 2009, according to the EBS trading platform.

"After a big spurt in the morning, it started to stick a bit, but the possibility of it getting to 100 has increased," said Soichiro Tsutsumi, a trader at eWarrant Japan Securities KK.

Last week, new BoJ governor Haruhiko Kuroda said the central bank would inject about $1.4tn into the economy in less than two years, a gamble that sent bond yields plummeting as prices rose on expectations of massive purchases of debt by the BoJ.

Analysts assume the flood of new money will be partly used by Japanese investors to buy higher yielding assets abroad, putting downward pressure on the yen.

JPMorgan analysts wrote in a client report that they had re-initiated a basket of yen shorts and were recommending the Australian dollar and Brazilian real as carry trades against the yen after the BoJ announced its aggressive stimulus plan.

The Australian dollar was up 0.2% against the yen at 102.12 yen after rallying to 102.32 yen, its highest since July 2008.

The euro climbed as far as 128.43 yen, its highest since January 2010, before pulling back to 127.90 yen, 0.9% higher than late US levels on Friday.

Some analysts said that a flare-up in the euro zone's problems could ramp up risk aversion, prompting investors to buy "safe haven" yen and put a floor under its slide. Others said signs of cracks in the US economic recovery could weigh on the dollar.

"Getting to 100 yen against the dollar is just a matter of time …But US data has been a bit mixed and if we have more negative data, then the dollar-yen could come under pressure," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp.

Underwhelming US payroll data out on Friday barely dented the dollar's gains against the Japanese currency as yen bears continued to celebrate the BoJ's aggressive stimulus plan.

"Kuroda's impact simply overshadowed the disappointing US data. I think the biggest obstacle for the yen will be people paying attention to the rising cost of imports and Japan's trade deficit," said Soichiro Tsutsumi, a trader at eWarrant Japan Securities.

A weakening yen has ramped up the cost of Japan's energy imports, with February's trade deficit of 777.5bn yen ($8bn) the widest on record for that month.

Since the BoJ unleashed the world's most intense burst of monetary stimulus last week, the yen has slumped more than 6% against both the dollar and euro.

"We expect further weakness ahead, given the bank's clear commitment to achieve its 2% (inflation) target," analysts at Barclays Capital said, adding they see the US dollar rising to 103 yen in three months.

With the Japanese currency still firmly in focus, the other major currencies took a backseat.

The euro slipped 0.1% against the dollar to $1.2982, hovering near a two-week high of $1.3040 set on Friday after weaker-than-expected employment growth cast a shadow on the US economic recovery picture.

With little economic data out on Monday, the downward pressure on the yen is seen as likely continuing through the day. more
Kuroda may soon discover that driving down the Yen's value may be more difficult than he imagined.  There's a lot of other weak currencies out there and the Yen may stay stubbornly high because of various flights to quality.  Then, if Japan starts growing economically again, the yen will become even more attractive.  Kuroda could wind up running his money creation scheme for quite awhile.

In the meantime, the move by BoJ will have some good knock-on effects in the rest of the world.  Kuroda is just getting started and already he is exporting prosperity.

European Government Borrowing Costs Are Plunging — And It's All Thanks To Japan

Matthew Boesler | Apr. 8, 2013

Government borrowing costs – as measured by 10-year sovereign bond yields – are hitting record lows across the euro zone "core" today.

In France, 10-year yields have fallen to 1.75 percent. The Belgian 10-year is at 1.95 percent, the Dutch 10-year is at 1.62 percent, and the Austrian 10-year is at 1.49 percent.

Matthew Boesler/Business Insider, data from Bloomberg

European leaders will be quick to take the credit. Economic austerity for troubled economies in the euro area periphery in need of financial assistance is still the main agenda. The idea is that markets reward the countries willing to undertake painful austerity measures with lower borrowing costs.

Linking austerity measures to lower borrowing costs, however, is a bit of a shaky exercise, as Pawel Morski points out. After all, the French economy is enduring a deepening recession, and the others are stumbling as well. A much simpler explanation for the steady march lower in euro zone bond yields is the introduction of monetary measures by the ECB last summer to pacify markets.

And the driver cited by many analysts for this latest move lower in French, Belgian, Dutch, and Austrian borrowing costs in recent weeks, sending them to record lows, is renewed interest in those bonds from Japanese institutional investors, like life insurers.

In Japan, new stimulus measures designed to weaken the yen are sending Japanese government bond yields lower, forcing Japanese institutions to go elsewhere for interest income.

"If Japanese institutional [investors] are under pressure because of the collapse in yields at the long-end of the Japanese curve, we may begin to see a wave of unhedged global yield buying," says Citi analyst Steven Englander.

According to Morgan Stanley analysts Elaine Lin and Maggie Chidothe, there are two big groups of Japanese investors driving the flows: life insurance companies and banks.

In a note to clients, Lin and Chidothe write:
Life insurance companies: Japanese lifers are heavily exposed to long-dated Japanese government bonds; their investment decisions will be affected the most by the Bank of Japan’s action. They have cut their exposures to peripheral sovereigns (Italy and Spain) at the height of the sovereign crisis. Appetite for peripheral sovereigns is likely to be dependent on the sovereign crisis outlook. However, for large core countries (Germany and France), there is potential for marginal demand given lower Japanese government bond yields. In particular, this could benefit demand for [French] OATs, given the more attractive yields compared to Germany.

Banks: Japanese banks are the major investors in European government bonds among the Japanese investor base. They have been increasing their exposure in European sovereigns since 2012, in particular via France, while maintaining a stable exposure to peripherals (Exhibit S3). This trend may continue given the outlook for a weaker yen. However, it is worth noting that Japanese banks are not heavily exposed to long-dated Japanese government bonds, so banks will be less affected by lower long-dated Japanese government bond yields and diversification needs may be less meaningful. more

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